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Financial markets remain under pressure

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THE MARKETS ON MONDAY COLUMN: Financial markets across the globe remain under pressure. The continuous threat of a full-scale war in the Middle East, as well as US uncertainty on the next move regarding interest rates, impose uncertainty and worries on global equity pressures, writes economist Chris Harmse.

The Federal Reserve building in Washington, US. Picture: Reuters

FINANCIAL markets across the globe remain under pressure. The continuous threat of a full-scale war in the Middle East, as well as US uncertainty on the next move regarding interest rates, impose uncertainty and worries on global equity pressures.

The latest poll by Reuters among 100 economists found that the majority now forecast that the US Federal Reserve (Fed) will not cut interest rates before its September meeting and are in consensus that the Fed now will only lower its bank rate two times this year.

This is a change from their previous meeting in March where it was announced that three interest rate cuts would take place during the past two quarters of 2024.

The increase in the various inflation rate data for the US, better- than-expected jobs data and upward pressure on wages mostly had put a lid on any prospects of cutting rates. In reaction, emerging market currencies suffered the most.

Domestically, after a two-month upswing, headline inflation tempered to 5.3% in March from 5.6% in February. The rate has now been between 5% and 6% since September 2023. The increase in consumer price inflation came down mostly due to the inflation for food and non-alcoholic beverages that has slowed to 5.1% in March from 6.1% in February. This is down from its recent peak of 14% in March 2023.

Despite this improvement, chances for a cut in the repo rate up to September remain very slim due to the risk of the rand depreciation that will spur a new wave of inflation pressures.

The rand/dollar rate accelerated further last week. The currency depreciated from the previous Friday’s R18.84 against the dollar to R19.16 last Thursday. Over the long run the rand now has depreciated from R7.27 against the dollar in 2011 to R14.45 in April 2019 and now is at R19.11.

On the JSE, given the geopolitical and economic realities on interest rates, share prices continue to remain under pressure. The All Share index lost another 2.6% last week, and now trades 4.6% lower than at the beginning of the year and 7% over the past year.

Despite higher prices for precious metals like gold and platinum, the resources 10 index also traded down by 4.21% last week. Financials (FIN15) lost 2.1% during the week and more than 11.5% since a year ago. The Industrial 25 index was down by 2% last week and trades 3.8% lower over the last year.

On Wall Street share prices are also under pressure. The Dow Jones Industrial index traded 0.6% lower last week and is now only 0.7% higher since the beginning of the year. The S&P500 decreased by 3.5% last week and is now 4.7% higher for the year-to-date.

This coming week the economic calendar for domestic indicators awaits the release by the SA Reserve Bank on Tuesday of the economy’s leading business cycle indicator for March, as well as its monetary policy review document.

On Thursday Statistics SA will publish South Africa’s producer price inflation data for March. It is expected that the main inflation rate at the factory gate will come down from an annualised 4.5% in February to 4.3% in March.

On global markets, the US will release its durable goods orders for March on Wednesday and its first estimated gross domestic product growth rate for quarter one 2024 on Thursday. It is expected that its economy has grown by 2.1%. This is much lower than the 3.4% growth rate during quarter four of 2023. The US will also publish its personal income and spending data for March on Friday. Elsewhere, the Bank of Japan will announce its interest rate decision on Friday.

* Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

– BUSINESS REPORT

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